NEW YORK (MarketWatch) -- The recent slide in commodity markets has turned attention onto the elephant in the room for global demand: whether China will continue to be the engine of growth.

The answer to that question will depend on how well the rapidly growing economic behemoth can perform a delicate balancing act.

As it transforms from a partially closed, export- and investment-led economy to a more open, consumer-driven model, it must cool the effects of overheating sufficiently to avoid inflation, but at the same time preserve growth.

The good news for buyers of emerging market and commodity currencies is that most money managers are, for now, betting that China pulls it off. But some investors worry that it could take a wrong turn and slam the brakes on the global recovery.

If the country's leaders get the sequencing wrong--if they lift capital controls without allowing the country's exchange rate to move, for instance--it could cause an unprecedented global economic "disaster," said Shang-Jin Wei, director of the Chazen Institute of International Business and a professor of finance and economics at Columbia University.

"I've worried about this for many years," Wei said. "Politics is the problem."

One piece of China's road to tighter economic policy fell into place Thursday when China again raised banks' reserve requirements, draining some liquidity from the financial system. China now requires large banks to hold 21% of their deposits in reserve at the central bank rather than lending them out.

So far, China seems to be tackling inflation, which hit an annual rate of 5.3% in April, through a combination of reserve requirements, modest interest rate hikes, and a gradual appreciation in its currency, which has risen by about 4.6% against the dollar since June 2010.

But for a longer-term fix to an economy that depends on cheap exports and has puny domestic consumption, more currency flexibility is key, Wei said--not just allowing the yuan to rise, but also allowing it to fall.

Part of how quickly Chinese officials move depends on global food and commodity prices, the economist said. "The faster the rise of those prices, the more urgency [Chinese leaders] will feel on doing something."

Even though longer-term issues loom in China's trade relations with the rest of the world, many money managers are confident China will tamp rising inflation without doing harm to the broader global economy.

"Once China allows its exchange rate to adjust, which is inevitable, currencies in other Asian countries will adjust upward," said Chris Dialynas, portfolio manager of the Pimco Unconstrained Bond Fund (PUBAX).

And that will not only help emerging Asian economies control inflation, but will "transfer purchasing power to the consumers," Dialynas said, a vital move if China is to go beyond being merely a source of cheap consumer goods for the developed world.

Michael Pettis, senior associate in the Carnegie Asia Program and a professor in Beijing at Peking University's Guanghua School of Management, said some Chinese officials understand the growth model--based on exporting cheap goods and throwing up infrastructure at a break-neck pace in sometimes economically unwarranted ways--is "not sustainable and has to change."

"The fact they have raised interest rates and hiked [reserve requirements] so dramatically is evidence that their arguments are starting to bite," Pettis said of one camp of Chinese leaders.

Still, growth is not going to slow for the next two years until new leadership takes place in late 2012," he said. That's when a new People's Congress for China begins.

"Unless inflation gets out of hand, or the trade environment gets really, really nasty, then we're probably going to see very, very good growth for the next year or two," Pettis said.

After that, China confronts the wall of debt it has accumulated by lending at ultra-low interest rates and must then move from an investment-based economy to a consumption-based one. And that point problems could materialize.

As with other investment-driven "economic miracles" -- Germany in the 1930, the Soviet Union in the 1950s and 1960s, and Japan in the 1970s and 1980s -- "you started seeing this unsustainable build up in debt," Pettis said. "In the early stages...building the first road is profitable, but what happens when you've built all the obvious things and now you're building more airports" than needed?

That's the argument of hedge fund manager and high-profile China bear Jim Chanos, who said in a CNBC interview last month that he worried that China won't be able to stop reinflating bubbles. "Every time they tap on the brakes, I worry they will hit the accelerator again," said Chanos, head of the Kynikos Associates hedge fund.

Even so, China's track record has been impressive. For now, it is "doing a good job at trying to navigate what's been an incredibly dynamic situation for them," said Geoffrey Pazzanese, co-manager of Federated's $951 million Intercontinental Fund (RIMAX), whose fund has no direct Chinese yuan exposure but instead invests in companies that sell to China, especially in Taiwan, Korea or Japan.

For now, though, most fund managers are betting on continued lightning growth and finding exposure to China however they can.

Pimco's Dialynas focuses some of the 35% currency component of this unconstrained bond fund on currencies in China's orbit--the Korean won, Malaysian ringgit, and others, along with Chinese yuan NDFs. Sara Zervos, a senior portfolio manager at Oppenheimer Funds goes for Chinese property companies, commodity-linked currencies--such as the Australian and New Zealand dollars--and manufacturers in Germany and Sweden that supply to emerging markets and China.

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